The aim of this essay is to analyze hyperinflation in developingcountries. It is often told thathyperinflation and inflation are associated with an expansionary monetarypolicy, which in the example of developing countries to a certain extent. Inaddition to general expansion of monetary, there are some kind of exogenousfactors that affect the economy to lead to hyperinflation and a simplistic relationship between thecentral bank of a nation and the government also contributes to hyperinflation of a country. In the economic growth of thedeveloping countries, hyperinflation is a matter of serious concern by itsimpacts upon national economic development. It is one of the rough indicatorsof the growth potential of a country as well as one of the obstacles todeveloping country.
if Zimbabwe is atypical example of hyperinflation. Zimbabwe is located in the southern regionof the African continent, in 2008, the first country to experience ahyperinflationary episode in the 21st century because the extremeand uncontrollable inflation made it the first and so far. It was difficult tomeasure hyperinflation of Zimbabwe because Zimbabwe’s government stopped filinginflation statistics. A brief ofhyperinflation:In economics, hyperinflation occurs when a country experiencesvery high and usually accelerating rates of inflation, it forces the populationto minimize their holdings of money. Under such conditions, the general pricelevel in an economy increases rapidly when the official currency quickly losesreal value. Meanwhile, the value of economic items generally stays the samewith respect to one another and remains relatively stable in terms of foreigncurrencies.
Unlike regular inflation, where the process of rising prices isprolonged and not noticeable except by studying past market prices,hyperinflation looks at a rapid and continues increasing in nominal prices, thenominal cost of goods, and the money supply. Hyperinflation often occurs when there is a very large in themoney supply, the gross domestic product (GDP) growth did not support, leadingto an imbalance in the supply and demand for the money when associated todepressions.Hyperinflation often occurs when there is a lack of confidence inthe ability of the currency to maintain its value so rapidly.
For this reason,sellers demand a risk premium to accept the currency, it forces they have toraise their prices when associated to wars. Inflation vs Hyperinflation:In a market economy, prices of goods or services are easilytransferable. Some prices may decrease, some may increase. The inflation occurswhen the price levels for goods and services are increasing, consequently, thepurchasing power of the currency is decreasing.
Moreover, goods and services becomeless available in comparison with the money in the economy. In other words,that is, when the supply of goods and services is lower than the demand forthem. For those reasons, in order to keep the economy running without a hitch, thecentral bank would like to restrict inflation, avoid deflation. For example, ifinflation rate is 3%, then a book that costs $10 in a given year, it will cost$10.03 the next year, and more money is required to purchase And hyperinflation is exceedingly rapid or out of controlinflation (very high inflation). Hyperinflation is often caused by an extremelyrapid growth in the money supply when the monetary and fiscal policy allows theissuance of new money to accommodate for government spending, the money supplygrows greater and faster than the real output of the economy and continuingincrease in the cost of goods.
There is no precise numerical indication ofhyperinflation, based on The Monetary Dynamics of Hyperinflation by PhillipCagan, hyperinflation is defined as starting in the monthly inflation rateexceeds 50%, and ending when the monthly inflation rate falls below 50% andlasts for at least one year. Let’s imagine if $50.000 – you could buy aapartment with that money, was enough to buy you lunch or dinner tomorrow.Another example, ” a loaf of bread costsyou 250 marks in January 1923 had risen to 200.000 million marks in September1923″, the currency of German became worthless.
The costs of hyperinflation:When the rise in money supply turns particular areas of pricingpower into a general spending before money becomes worthless. No one is willingto hold currency which raises the velocity of money and this becomes worsen thecrisis. Because the purchasing power of currency falls rapidly that holdingcash is an unacceptable loss of purchasing power.
Hyperinflation effectively destroys completelythe private and public saving, the economy is distorted in favor of thehoarding of assets, resulting in the monetary base to fly the country andmaking the afflicter’s reluctance to invest. Business executives devotea great amount of time and energy to cash management when cash loses its value quickly. Bydiverting at this time and energy from more socially valuable activities, suchas production and investment decisions, hyperinflation makes the economy lessefficiently. Menucosts are one of the influences being affected by inflation.
It alsobecomes larger under hyperinflation. The price level change and increase sooften, of course, firms have to changeprices that normal business practices such as printing, updating or distributingcatalogs with fixed prices, become unfeasible. Taxsystems are under hyperinflation’s influences. Existing a delay betweenthe time a leviable tax and the time it is paid to the government.
Sincehyperinflation has occurred, even a short-delay also has reduced significantlyreal tax revenue. Due to the money has fallen in value, the government gets themoney by the time. If persistence or worsening of the current hyperinflation continues,the real tax revenue of the government will fall substantially.
Money loses its role as a store of value, medium of exchange andunit of account. The rise in money supply, the government need to overcome thisproblem by adding more and more zeros to the paper currency. The mental value of coins are rapid casualties of hyperinflations,especially pennies and nickels are very close to the face value.
The mentalvalue of coins tremendously exceeded the face value. When a large amount of price change frequently, that would be definitelyhard for customers to do the shopping for the best price. Highly liablevolatile and greatly rising price, it leads to currency losing value quickerthat assets purchased with it. During the period ofhyperinflation, central banks should run loans for 24-hour periods or shortperiods, they can offer higher interest rate for deposits. With the aim ofencouraging people in order to deposit the currency in banks and reducing themoney supply in economy.